school specialty, inc. fiscal 2014 first quarter update ... · emergence from chapter 11...
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School Specialty, Inc.
Fiscal 2014 First Quarter Update
September 19, 2013
Safe Harbor Statement
This presentation contains statements about future financial conditions, results of operations, expectations, plans, or prospects, including the information
in the heading “FY14 Financial Outlook”, that constitute forward-looking statements. Forward-looking statements also include those preceded or
followed by the words "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "should,” "plans," "targets" and/or similar expressions.
These forward-looking statements are based on School Specialty's current estimates and assumptions as of the date of the information presented and,
as such, involve uncertainty and risk. Forward-looking statements are not guarantees of future performance, and actual results may differ materially
from those contemplated by the forward-looking statements because of a number of factors, including the factors described in Item 1A of School
Specialty's Annual Report on Form 10-K for the fiscal year ended April 27, 2013, which factors are incorporated herein by reference. Except to the
extent required under the federal securities laws, School Specialty does not intend to update or revise the forward-looking statements.
Non-GAAP Financial Information
The Company adopted fresh start accounting and reporting effective June 11, 2013, the Fresh Start Reporting Date. The financial statements as of the
Fresh Start Reporting Date report the results of the Successor Company with no beginning retained earnings or accumulated deficit. Any financial
statement presentation of the Successor Company represents the financial position and results of operations of a new reporting entity and is not
comparable to prior periods presented by the Predecessor Company. The financial statements for periods ended prior to the Fresh Start Reporting Date
do not include the effect of any changes in the Predecessor Company’s capital structure or changes in the fair value of assets and liabilities as a result
of fresh start accounting.
Accordingly, this presentation includes non-GAAP financial information that combines GAAP results of the Successor Company for the seven weeks
ended July 27, 2013 and GAAP results of the Predecessor Company for the six weeks ended June 11, 2013 and compares the combined results to the
Predecessor Company’s GAAP results for the three months ended July 28, 2012.
Management believes that the presentation of the combined results offers a useful non-GAAP normalized comparison to GAAP results of the
Predecessor Company for the three months ended July 27, 2013.
This presentation also includes a presentation of Adjusted EBITDA, a non-GAAP financial measure. Adjusted EBITDA is used by management as a
measure for judging the company’s operating performance and for estimating the company’s earnings growth prospects. Adjusted EBITDA does not
represent, and should not be considered, an alternative to net income or operating income as determined by GAAP, and our calculation may not be
comparable to similarly titled measures reported by other companies.
A reconciliation of the combined results to the most directly comparable GAAP measures and of Adjusted EBITDA to combined net income is included in
thisFiscal 2014 First Quarter Update dated September 19, 2013.
Safe Harbor Statement/Non-GAAP Financial Information
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Fiscal 2014 – 1Q Corporate Highlights
June 2013
• Successful emergence from Chapter 11 with new financing and significant new equity investment
– New ownership and financing facilities
– Improved capital position with stronger balance sheet
– New equity investment in the form of equitization of DIP term loan upon emergence from Chapter 11
July 2013
• Change in Senior Leadership
– Jim Henderson, Chairman, replaces Mike Lavelle and named Interim President and CEO
– Dave Vander Ploeg, CFO to retire at year-end
August 2013
• Process Improvement Program Begins
– Plans set for Distribution and Curriculum realignment
– Distribution Center consolidation plans approved; Project Management Office and Steering Committee established
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Emergence from Chapter 11 Reorganization
• Court approved plan of reorganization on May 23, 2013
• Completed financial restructuring and emerged from Chapter 11 on June 11, 2013
• Company raises $320 million in exit financing
– 5-year $175 million Asset Based Loan led by Bank of America, N.A. and SunTrust Bank
– 6-year $145 million Senior Secured Term Loan led by Credit Suisse Securities (USA) LLC
• More flexible capital structure in place to fund corporate strategy and operational realignment
• Working with vendors to set terms and secure deliveries for customers
• New ownership structure – issuance of approximately 1 million shares of new common stock to
pre-petition DIP lenders and convertible bondholders
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Changes in Senior Leadership
• Jim Henderson, Chairman of the Board, replaces Michael Lavelle as Interim President and CEO
– Appointed by SSI Board of Directors
– Significant financial, operational and turnaround expertise
– Former COO, CFO and CEO of both public and private companies
– Previously a Managing Director and operating partner of Steel Partners LLC
– Currently serves as a Director of GenCorp and previously a director with DGT Holdings Corp., SL
Industries, Inc., Point Blank Solutions, Inc., Angelica Corporation and WebFinancial Corporation
• Dave Vander Ploeg, CFO, announces retirement
– Vander Ploeg to stay on with company through year-end to support transition
• Board of Directors has retained Heidrick & Struggles
– Comprehensive search for CEO underway to find candidate with the right mix of industry
knowledge, distribution expertise and turnaround experience
– Search for new Board member and CFO to continue following CEO retention
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Process Improvement Program Initiated
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• Board of Directors has conducted operational assessment with support of Synergetics Worldwide
• Program reviewed and approved – officially commenced in September 2013
• Project Management Office and Steering Committees formed (led by Jim Henderson)
• Intended to drive operational process improvements and customer and supply chain efficiencies
• Expected to positively impact FY14 results without impacting customer-facing initiatives
• Annualized savings anticipated to be between $12-$15 million
– One-time cash generation expected to be in excess of $20 million, primarily from inventory
reduction due to consolidation of DCs
• Expect to launch additional phases in Process Improvement Program as Company reaches
project milestones
Fiscal First Quarter Comparisons
Period Ended July 27, 2013 vs. Period Ended July 28, 2012
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Consolidated Combined Statement of Operations
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In Thousands, Except Per Share Amounts
Unaudited / Non-GAAP
Successor
Company
Predecessor
Company
Non-GAAP
Combined
Predecessor
Company
Seven Weeks Ended
July 27, 2013
Six Weeks Ended
June 11, 2013
Three Months Ended
July 27, 2013
Three Months Ended
July 28, 2012
Revenues………………………………………………………………………………………. 143,499$ 58,697$ 202,196$ 252,139$
Cost of revenues…………………………………………………………………………….. 83,741 35,079 118,820 148,542
Gross profit…………………………………………………………………………………. 59,758 23,618 83,376 103,597
Selling, general and administrative expenses………………………………………………. 35,867 27,473 63,340 75,116
Bankruptcy related restructuring charges…………………………….. 2,595 - 2,595 -
Operating income………………………………………………………………………….. 21,296 (3,855) 17,441 28,481
Other expense:
Interest expense……………………………………………………………………………… 2,821 3,235 6,056 9,966
Reorganization items, net………………………………………………………………………… 1,280 (106,174) (104,894) -
Income before provision for income taxes………………………………………………… 17,195 99,084 116,279 18,515
Provision for income taxes……………………………………………………………………. 252 1,641 1,893 259
Income before income of unconsolidated affiliate………………… 16,943 97,443 114,386 18,256
Income of unconsolidated affiliate………………………………………. - - - 119
Net income……………………………………………………………………………………… 16,943$ 97,443$ 114,386$ 18,375$
Adjusted EBITDA Comparisons
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In Thousands, Except Per Share Amounts
Unaudited / Non-GAAP
Non-GAAP
Combined
Predecessor
Company
Three Months Ended
July 27, 2013
Three Months Ended
July 28, 2012
Adjusted Earnings before interest, taxes, depreciation,
amortization, banruptcy-related restructuring and impairment
charges (EBITDA) reconciliation:
Net income 114,386$ 18,375$
Equity in (income)/losses of unconsolidated affiliate - (119)
Provision for income taxes 1,893 259
Reorganization items, net (104,894) -
Bankruptcy related restructuring costs 2,595 -
Share-based compensation expense - 119
Depreciation and amortization expense 5,849 7,016
Amortization of development costs 2,396 2,068
Net interest expense 6,056 9,966
Adjusted EBITDA 28,281$ 37,684$
FY14 1Q Results Review
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• Combined revenue of $202.2 million, down $49.9 million or $19.8% YoY
– However, additional $22 million of orders received in Q1 were shifted into Q2
– Order flow and bookings tempo have increased during Q2
– Q1 revenues were -13% vs. forecast due to issues described above, Q2 revenues expected to be +10% vs.
forecast
• Combined gross profit margins increase 10 basis points to 41.2%
– Educational Resources margins increase due to product mix; Accelerated Learning margins decline due to
product development costs
• Combined SG&A of $63.3 million, down $11.8 million or 15.7%
– Cost control measures instituted in Q1 drive declines
– New programs initiated in Q2 intended to drive incremental savings in FY14 and lower fixed cost base in FY15
• Company records $104.9 million net restructuring gain related to cancellation of indebtedness,
offset by reorganization, financing, professional services fee and fresh start accounting
• Q1 Adjusted EBITDA of $28.2 million and net income of $114.4 million
– Adjusted EBITDA affected by “timing” impact of orders which flowed into Q2
Condensed Consolidated Balance Sheet Comparison
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In Thousands, Except Per Share Data
Successor Company
July 27, 2013 April 27, 2013 July 28, 2012
ASSETS
Current assets:
Cash and cash equivalents……………………………………………………………………………….. 9,787$ 20,769$ 5,542$
Restricted cash……………………………………………………………………………….. 25,820 26,302 2,708
Accounts receivable, less allowance for doubtful accounts
of $2,176, $926 and $2,597, respectively…………………………………………….…………….. 138,879 58,942 178,293
Inventories ………………………………………………………………………………… 104,868 92,582 112,467
Deferred catalog costs …………………………….…………………………………………………………. 5,793 8,924 7,773
Prepaid expenses and other current assets ………………………………………….. 26,667 29,901 11,050
Refundable income taxes ………………………………………………………………… 5,334 9,793 3,580
Deferred taxes ………………………………………………...……………………………………… - - 4,797
Total current assets ……………………………..…………………………………………………. 317,148 247,213 326,210
Property, plant and equipment, net …………………………………………………..……………… 46,309 39,209 54,238
Goodwill ……………………………………………………………………………...………………………. 23,661 - 41,010
Intangible assets, net ……………………………………………………………..…...………………………………….. 47,427 110,306 121,627
Development costs and other ………………………………………………………………………… 38,042 30,079 40,274
Deferred taxes long-term ………………………………………………………………….. 51 51 390
Investment in unconsolidated affiliate ………………………………………………….. 715 715 10,019
Total assets …………………………………………………………………………………...…………………. 473,353$ 427,573$ 593,768$
Predecessor Company
Consolidated Balance Sheet Comparison (Cont’d)
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In Thousands, Except Per Share Data Successor Company
July 27, 2013 April 27, 2013 July 28, 2012
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities - long-term debt……………………………………………………...…………………….. 62,229$ 198,302$ 79,444$
Accounts payable……………………………………………………………...……………………………….. 49,124 22,897 103,099
Accrued compensation…………………………………………………………...……………………………….. 7,597 7,197 10,723
Deferred revenue……………………………………………...………………………………… 2,605 2,237 3,354
Accrued fee for early termination of long-term debt…………………………………………...………………………………… 25,582 25,000 -
Other accrued liabilities……………………………………………..…………………………………. 34,467 21,905 26,027
Total current liabilities…………………………………………………………………….. 181,604 277,538 222,647
Long-term debt - less current maturities……………………………...…………………………. 152,932 - 285,508
Other liabilities……………………………………………………………….……………………………… 925 925 587
Liabilities subject to compromise…………………………………………………………. - 228,302 -
Total liabilities…………………………………………………………………………………. 335,461 506,765 508,742
Commitments and contingencies
Stockholders' equity (deficit):
Predecessor preferred stock, $0.001 par value per share, 1,000,000
shares authorized; none outstanding……………………………………………………………………………. - - -
Predecessor common stock, $0.001 par value per share, 150,000,000 shares
authorized; 24,599,159 and 24,597,856 shares issued, respectively………………….. - 24 24
Predecessor capital in excess of par value……………………………………………………………. 446,232 444,456
Predecessor treasury stock, at cost, 5,420,210 and 5,420,210 shares, respectively………….. - (186,637) (186,637)
Successor preferred stock, $0.001 par value per share, 500,000
shares authorized; none outstanding……………………………………………………………………………. - - -
Successor common stock, $0.001 par value per share, 2,000,000 shares
authorized; 1,000,004 shares outstanding……………………………………………….. 1 - -
Successor capital in excess of par value…………………………………………………………. 120,955 - -
Accumulated other comprehensive income (loss)………………………………………………………….. (7) 22,381 22,308
Retained earnings (accumulated deficit)…………………………………………………………………………………. 16,943 (361,192) (195,125)
Total stockholders' equity (deficit)…………………………………………….……………………………. 137,892 (79,192) 85,026
Total liabilities and stockholders' equity (deficit)………………….…………………………..…………………….. 473,353$ 427,573$ 593,768$
Predecessor Company
Balance Sheet Review
• Recapitalization has de-levered the Company with total debt down by approximately $160 million
from year-end and approximately $150 million from Q1 last year
• Successor company assets restated to fair value as of June 11, 2013
• ABL balance of $60.8 million at end of Q1-14 versus $123.4 million at end of Q1-13
– Expect this to be peak ABL draw in fiscal year 2014
– Significant availability in excess of ABL balance at quarter end
• Accounts payable balances down $53 million YoY as Company continues efforts to restore trade
credit with all vendors
– Approximately 50% of trade vendors have returned to normal credit terms
– Prepaid inventory is up approximately $15 million YoY
• Management focused on efforts to unlock “trapped cash” in working capital
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Consolidated Statement of Cash Flows
In Thousands, Except Per Share Data
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Successor Company Predecessor Company Non-GAAP Combined
Predecessor
Company
Seven Weeks Ended
July 27, 2013
Six Weeks Ended
June 11, 2013
Three Months Ended
July 27, 2013
Three Months Ended
July 28, 2012
Cash flows from operating activities:
Net income……………………………………………………………………………………….. 16,943$ 97,443$ 114,386$ 18,375$
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and intangible asset amortization expense……………………………………………………… 2,866 2,983 5,849 7,016
Amortization of development costs…………………………………………………………….. 1,478 918 2,396 2,068
Non-cash reorganization items………………………………………………………. - (121,043) (121,043) -
Amortization of debt fees and other…………………………………………………….. 392 9 401 3,053
(Income) loss of unconsolidated affiliate…………………………………………… - - (119)
Share-based compensation expense…………………………………………………….. - - - 119
Non-cash convertible debt interest expense…………………………. - - 2,222
Changes in current assets and liabilities:
Accounts receivable………………………………………………………………………. (72,188) (8,011) (80,199) (115,498)
Inventories……………………………………………………………………………….. (2,182) (18,255) (20,437) (11,966)
Deferred catalog costs…………………………………………………………………….. 1,377 1,754 3,131 3,964
Prepaid expenses and other current assets…………………………………………….. 5,010 722 5,732 49
Accounts payable…………………………………………………………………………. 10,879 11,012 21,891 28,324
Accrued liabilities…………………………………………………………………………. (6,067) 12,488 6,421 9,492
Net cash used in operating activities…………………………………………………. (41,492) (19,980) (61,472) (52,901)
Cash flows from investing activities:
Additions to property, plant and equipment…………………………………………………. (514) (243) (757) (1,185)
Change in restricted cash…………………………………………………. 482 - 482 (2,708)
Investment in product development costs………………………………………………………… (880) (463) (1,343) (1,718)
Net cash used in investing activities…………………………………………………….. (912) (706) (1,618) (5,611)
Cash flows from financing activities:
Proceeds from bank borrowings, net…………………………………………………………….. 37,042 7,561 44,603 478,668
Repayment of debt and capital leases……………………………………………………. - (148,619) (148,619) (406,623)
Issuance of debt…………...…………………………………………………. - 165,924 165,924 -
Payment of debt fees and other……………………………………………………. (385) (9,415) (9,800) (8,475)
Net cash provided by financing activities………………………………………….. 36,657 15,451 52,108 63,570
Net increase/(decrease) in cash and cash equivalents…………………………………………………. (5,747) (5,235) (10,982) 5,058
Cash and cash equivalents, beginning of period………………………………………….. 15,534 20,769 20,769 484
Cash and cash equivalents, end of period…………………………………………………… 9,787$ 15,534$ 9,787$ 5,542$
Supplemental disclosures of cash flow information:
Interest paid………………………………………………………………………………………… 2,152$ 601$ 4,504$
Income taxes paid…………………………………………………………………………………… -$ -$ 371$
Process Improvement Program
Companywide efficiency driven programs focused on processes
• Phase I: LEAN Process Implementations
Product Management and S&OP
Warehouse and Distribution Center Configuration
SKU Rationalization
• Phase II: Sales, Marketing and Merchandising Alignment
SKU Rationalization (ongoing)
Customer Care Process Management
Corporate Consolidation Programs
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Operational Updates
• Distribution Center consolidation
– Two distribution centers to be closed by December 2013
– Company to invest in Mansfield, OH operations with Greenville, WI providing surge capacity
– Proximity to customers and key suppliers drive moves
• Exiting of Commercial Printing operations
– Sale of Premier Graphics to local company who becomes Print Partner
– Closing of Hammond and Stephens Print Plant in Salina, KS
– Transition to outsourced model; resources placed behind sales and brands
• Companywide realignment
– Back-end realignment around Distribution business model
– Planned integration of Science and Reading groups into Curriculum segment
Expected FY14 cost savings: $3-$5 million
Expected Annualized cost savings: $12-$15 million
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FY14 Financial Outlook
• Net revenues expected to be between $620 - $630 million; Business conditions improving and
revenue tracking in line with FY14 plan post-reorganization
– Core supplies business expected to exceed forecast for first half and full year of Fiscal ‘14
• Gross profit margins to be comparable with prior years
• Restructuring charges anticipated to be $12-$14 million
• Cap Ex to be approximately $16-17 million (budgeted at $19 million)
• EBITDA expected to be $40-$44 million, which includes $2 million of public company costs not
originally included in disclosure statement forecast
– EBITDA excluding public company costs expected to be in line with disclosure statement forecast
• Process Improvement Programs expected to reduce FY14 costs by $3-$5 million; anticipate lower
fixed costs in FY15; Company expects annualized recurring savings of $12-15 million
– Programs to generate one-time cash savings in excess of $20 million
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Top Corporate Priorities
Stabilize revenue
Align organization and footprint to reflect current sales
Drive sustainable and improved earnings and cash flow
Put a foundation in place for long-term growth
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Get Back to Supporting our Trusted Brands
Investor Contacts:
David N. Vander Ploeg
Chief Financial Officer
920.882.5854
Glenn Wiener
Investor Relations
920.243.5392
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